Sudden distress at top-rated firm tests China’s rating crackdown

[BEIJING] Less than six months ago, China’s central bank made its biggest push yet to tackle inflated credit ratings in the nation’s US$5.6 trillion corporate debt market. Now it has a live test case. 

Zhuhai Huafa, a state-owned conglomerate, has retained its top AAA grade from a major local rating firm despite its bonds plunging to distressed levels after news that it missed two trust product payments. Huafa is rated BBB by Fitch Ratings, on the lower end of investment grade. Both companies have put Huafa on negative watch, raising the possibility of a downgrade. 

Huafa’s strong local rating isn’t an anomaly. Out of more than 6,000 bond issuers in China, about 28 per cent were rated AAA by domestic credit assessors at the end of the second quarter, according to a report by the Securities Association of China.

Only three US companies – Apple, Microsoft and Johnson & Johnson – have AAA ratings from Fitch, Moody’s or S&P, according to data compiled by Bloomberg. 

Chinese regulators have tried to address that gap and asked domestic rating firms to take a closer look at issuers with AAA ratings, people familiar with the matter said in June.

But downgrading a large state-backed borrower is a high-stakes decision. The move could force some investors to sell their bonds, potentially reviving a broader sell-off in Chinese credit markets triggered by Huafa’s distress. 

THE BUSINESS TIMES INSIGHTS

Powering Asean's Future 2026

Find out how enterprises are navigating power constraints and sustainability targets

ACCESS THE INSIGHTS

“This reflects a longstanding dilemma in the credit-rating industry,” said Li Gen, founder of Beijing G Capital Private Fund Management Center. “Rating firms often have to weigh factors beyond an issuer’s debt-serving capacity.”

Investors should not interpret the maintenance of a rating to mean that risk has not increased, Li said. Rather, the key question is whether any state support can help the company repay its debt in time, he said. 

China Lianhe Credit Rating, which issued Huafa’s AAA rating, and the People’s Bank of China didn’t respond to requests seeking comment. 

SEE ALSO

China’s Huafa gains ‘full support’ of local government amid bond selloff

Huafa is owned by Guangdong, China’s biggest provincial economy, and helped build landmarks including the 330-meter tall Zhuhai Tower skyscraper.

While the nation has seen high-profile defaults by state-controlled firms, including Tianjin’s Tewoo and Henan’s Yongcheng Coal & Electricity, they have become rare in recent years because of accommodative monetary policy and a government push to contain debt risks tied to local authorities. 

Huafa has been meeting its bond repayments and the state asset regulator in Zhuhai pledged full support for the company. But investors are anxious about the firm’s long-term debt outlook as it remains saddled with US$62 billion of borrowings and profits have slowed. 

Several Chinese companies have kept their AAA ratings even in the midst of defaults or debt restructuring. 

China Vanke was rated AAA last year when it sought to delay repayment of its onshore bonds. It stopped working with rating firms in early December.

A key subsidiary of China Evergrande, whose spectacular collapse has become a marker of the property crisis, was only downgraded months after Evergrande warned government officials it faced a potential default.  

The Chinese central bank’s advice on reassessing AAA ratings suggested that issuers whose spreads widen more than 200 basis points could be downgraded, the people familiar said earlier. A number of Huafa’s domestic yuan notes have fallen below 70 per cent of their face value, with yields to maturity soaring above 10 per cent. 

In a June rating report, Lianhe affirmed Huafa’s AAA rating due to expectations for strong government support. Fitch also cited likely state support as a reason for maintaining its rating, though it warned that the Huafa could still be downgraded by multiple levels and faces increasing refinancing risk. 

“Rating actions by onshore agencies tend to drastically lag behind credit developments,” said Zerlina Zeng, head of Asia credit strategy at Creditsights Singapore. For companies that have to keep borrowing to stay afloat, she said, “price movements are a very important barometer of its credit condition.” BLOOMBERG